The Budget Solution: Taxes

January 27, 1986

A TAX INCREASE is now essential -- but how big, and what kind of a tax? The arithmetic starts with the federal deficit, which, in the absence of further action, would be about $215 billion this year. It doesn't need to be reduced to zero. The target ought to be a small deficit of about $50 billion a year -- not enough to threaten economic trouble, but enough to exert a gentle pressure toward business expansion and a lower unemployment rate. That leaves a gap of $165 billion to be closed.

Some of it can be gained through cuts in spending, although it is not plausible to expect very much more than $15 billion there. Over the five years since President Reagan took office, the country has come to a pretty firm consensus on federal responsibilities, from national defense to social benefits; there are still opportunities for further cuts but, as we have been arguing in this space, the opportunities are not large. Perhaps something can be gained from the sale of government assets, although the congressional tangle over Conrail -- which seems to be moving toward total deadlock -- illustrates the difficulty of selling even those assets that ought to be sold. On balance, roughly $150 billion a year needs to be raised in additional revenue. Where?

The falling price of oil offers Congress a glorious opportunity. Each penny of tax on a gallon of gasoline raises $1 billion a year. If Congress were to raise the gas tax 25 cents a gallon, it would still be cheaper, discounting inflation, than it was four years ago. It would have none of the harsh social and commercial effects of a tax on fuel oil. Nor, like a tax on oil imports, would it distribute most of its benefits to American oil producers. There is no better way to raise $25 billion than with the gasoline tax.

It would also be reasonable to tax half of all Social Security benefits as ordinary income, without the present high threshold that exempts all but those recipients with incomes well above average. It would be infinitely fairer than delays in cost-of- living increases, which, unlike the income tax, would hit recipients living at the edge of poverty as well as the more affluent. Broader taxation of Social Security and the other income maintenance benefits could reduce the cost of federal entitlements by more than $10 billion a year.

All of that would still leave something in the range of $115 billion a year to be raised. How? The best and fairest American tax is still the income tax. It distinguishes between rich and poor, and between those who carry heavy obligations and those who do not. The income tax reform bill now halfway through Congress will broaden the tax base and improve the law in important respects. That bill ought now become the vehicle for a tax irease. That $115 billion would represent an increase of slightly over one- fourth in present income taxes.

The alternative is a value-added tax or -- the same thing -- a national sales tax. It's far less desirable than the income tax, for it makes no allowances for the differing circumstances among families and businesses. But if Congress prefers it, a 5 percent value added tax -- with no exemptions -- would raise the necessary money.

When President Reagan came to office five years ago, he promised to cut taxes, cut spending and balance the budget. Cutting taxes was the easy part. He has never even asked for spending cuts large enough to balance the budget -- and Congress has rejected some of the cuts for which he did ask. He inherited a substantial deficit, and over the past years he has let it soar to the highest levels since World War II. It is pushing up interest rates, distorting the structure of the American economy and jeopardizing prosperity. The federal government is raising only $4 for every $5 that it spends. The time has come for the United States to do a better job of paying its bills.